The Principles of Political Economy
by John Stuart Mill
Book 1, Chapter 6
On Circulating and Fixed Capital
1. To complete our explanations on the subject of capital, it
is necessary to say something of the two species into which it is
usually divided. The distinction is very obvious, and though not
named, has been often adverted to, in the two preceding chapters:
but it is now proper to define it accurately, and to point out a
few of its consequences.
Of the capital engaged in the production of any commodity,
there is a part which, after being once used, exists no longer as
capital; is no longer capable of rendering service to production,
or at least not the same service, nor to the same sort of
production. Such, for example, is the portion of capital which
consists of materials. The tallow and alkali of which soap is
made, once used in the manufacture, are destroyed as alkali and
tallow; and cannot be employed any further in the soap
manufacture, though in their altered condition, as soap, they are
capable of being used as a material or an instrument in other
branches of manufacture. In the same division must be placed the
portion of capital which is paid as the wages, or consumed as the
subsistence, of labourers. The part of the capital of a
cottonspinner which he pays away to his work-people, once so
paid, exists no longer as his capital, or as a cotton-spinner's
capital: such portion of it as the workmen consume, no longer
exists as capital at all: even if they save any part, it may now
be more properly regarded as a fresh capital, the result of a
second act of accumulation. Capital which in this manner fulfils
the whole of its office in the production in which it is engaged,
by a single use, is called Circulating Capital. The term, which
is not very appropriate, is derived from the circumstance, that
this portion of capital requires to be constantly renewed by the
sale of the finished product, and when renewed is perpetually
parted with in buying materials and paying wages; so that it does
its work, not by being kept, but by changing hands.
Another large portion of capital, however, consists in
instruments of production, of a more or less permanent character;
which produce their effect not by being parted with, but by being
kept; and the efficacy of which is not exhausted by a single use.
To this class belong buildings, machinery, and all or most things
known by the name of implements or tools. The durability of some
of these is considerable, and their function as productive
instruments is prolonged through many repetitions of the
productive operation. In this class must likewise be included
capital sunk (as the expression is) in permanent improvements of
land. So also the capital expended once for all, in the
commencement of an undertaking, to prepare the way for subsequent
operations: the expense of opening a mine, for example: of
cutting canals, of making roads or docks. Other examples might be
added, but these are sufficient. Capital which exists in any of
these durable shapes, and the return to which is spread over a
period of corresponding duration, is called Fixed Capital.
Of fixed capital, some kinds require to be occasionally or
periodically renewed. Such are all implements and buildings: they
require, at intervals, partial renewal by means of repairs, and
are at last entirely worn out, and cannot be of any further
service as buildings and implements, but fall back into the class
of materials. In other cases, the capital does not, unless as a
consequence of some unusual accident, require entire renewal: but
there is always some outlay needed, either regularly or at least
occasionally, to keep it up. A dock or a canal, once made, does
not require, like a machine, to be made again, unless purposely
destroyed, or unless an earthquake or some similar catastrophe
has filled it up: but regular and frequent outlays are necessary
to keep it in repair. The cost of opening a mine needs not be
incurred a second time; but unless some one goes to the expense
of keeping the mine clear of water, it is soon rendered useless.
The most permanent of all kinds of fixed capital is that employed
in giving increased productiveness to a natural agent, such as
land. The draining of marshy or inundated tracts like the Bedford
Level, the reclaiming of land from the sea, or its protection by
embankments, are improvements calculated for perpetuity; but
drains and dykes require frequent repairs. The same character of
perpetuity belongs to the improvement of land by subsoil
draining, which adds so much to the productiveness of the clay
soils; or by permanent manures, that is, by the addition to the
soil, not of the substances which enter into the composition of
vegetables, and which are therefore consumed by vegetation, but
of those which merely alter the relation of the soil to air and
water; as sand and lime on the heavy soils, clay and marl on the
light. Even such works, however, require some, though it may be
very little, occasional outlay to maintain their full effect.
These improvements, however, by the very fact of their
deserving that title, produce an increase of return, which, after
defraying all expenditure necessary for keeping them up, still
leaves a surplus. This surplus forms the return to the capital
sunk in the first instance, and that return does not, as in the
case of machinery, terminate by the wearing out of the machine,
but continues for ever. The land, thus increased in
productiveness, bears a value in the market, proportional to the
increase: and hence it is usual to consider the capital which was
invested, or sunk, in making the improvement, as still existing
in the increased value of the land. There must be no mistake,
however. The capital, like all other capital, has been consumed.
It was consumed in maintaining the labourers who executed the
improvement, and in the wear and tear of the tools by which they
were assisted. But it was consumed productively, and has left a
permanent result in the improved productiveness of an
appropriated natural agent, the land. We may call the increased
produce the joint result of the land and of a capital fixed in
the land. But as the capital, having in reality been consumed,
cannot be withdrawn, its productiveness is thenceforth
indissolubly blended with that arising from the original
qualities of the soil; and the remuneration for the use of it
thenceforth depends, not upon the laws which govern the returns
to labour and capital, but upon those which govern the recompense
for natural agents. What these are, we shall see hereafter.(1*)
2. There is a great difference between the effects of
circulating and those of fixed capital, on the amount of the
gross produce of the country. Circulating capital being destroyed
as such, or at any rate finally lost to the owner, by a single
use; and the product resulting from that one use being the only
source from which the owner can replace the capital, or obtain
any remuneration for its productive employment; the product must
of course be sufficient for those purposes, or in other words,
the result of a single use must be a reproduction equal to the
whole amount of the circulating capital used, and a profit
besides. This, however, is by no means necessary in the case of
fixed capital. Since machinery, for example, is not wholly
consumed by one use, it is not necessary that it should be wholly
replaced from the product of that use. The machine answers the
purpose of its owner if it brings in, during each interval of
time, enough to cover the expense of repairs, and the
deterioration in value which the machine has sustained during the
same time, with a surplus sufficient to yield the ordinary profit
on the entire value of the machine.
From this it follows that all increase of fixed capital, when
taking place at the expense of circulating, must be, at least
temporarily, prejudicial to the interests of the labourers. This
is true, not of machinery alone, but of all improvements by which
capital is sunk; that is, rendered permanently incapable of being
applied to the maintenance and remuneration of labour. Suppose
that a person farms his own land, with a capital of two thousand
quarters of corn, employed in maintaining labourers during one
year (for simplicity we omit the consideration of seed and
tools), whose labour produces him annually two thousand four
hundred quarters, being a profit of twenty per cent. This profit
we shall suppose that he annually consumes, carrying on his
operations from year to year on the original capital of two
thousand quarters. Let us now suppose that by the expenditure of
half his capital he effects a permanent improvement of his land,
which is executed by half his labourers, and occupies them for a
year, after which he will only require, for the effectual
cultivation of his land, half as many labourers as before. The
remainder of his capital he employs as usual. In the first year
there is no difference in the condition of the labourers, except
that part of them have received the same pay for an operation on
the land, which they previously obtained for ploughing, sowing,
and reaping. At the end of the year, however, the improver has
not, as before, a capital of two thousand quarters of corn. Only
one thousand quarters of his capital have been reproduced in the
usual way: he has now only those thousand quarters and his
improvement. He will employ, in the next and in each following
year, only half the number of labourers, and will divide among
them only half the former quantity of subsistence. The loss will
soon be made up to them if the improved land, with the diminished
quantity of labour, produces two thousand four hundred quarters
as before, because so enormous an accession of gain will probably
induce the improver to save a part, add it to his capital, and
become a larger employer of labour. But it is conceivable that
this may not be the case; for (supposing, as we may do, that the
improvement will last indefinitely, without any outlay worth
mentioning to keep it up) the improver will have gained largely
by his improvement if the land now yields, not two thousand four
hundred, but one thousand five hundred quarters; since this will
replace the one thousand quarters forming his present circulating
capital, with a profit of twenty-five per cent (instead of twenty
as before) on the whole capital, fixed and circulating together.
The improvement, therefore, may be a very profitable one to him,
and yet very injurious to the labourers.
The supposition, in the terms in which it has been stated, is
purely ideal; or at most applicable only to such a case as that
of the conversion of arable land into pasture, which, though
formerly a frequent practice, is regarded by modern
agriculturists as the reverse of an improvement.(2*) But this
does not affect the substance of the argument. Suppose that the
improvement does not operate in the manner supposed -- does not
enable a part of the labour previously employed on the land to be
dispensed with -- but only enables the same labour to raise a
greater produce. Suppose, too, that the greater produce, which by
means of the improvement can be raised from the soil with the
same labour, is all wanted, and will find purchasers. The
improver will in that case require the same number of labourers
as before, at the same wages. But where will he find the means of
paying them? He has no longer his original capital of two
thousand quarters disposable for the purpose. One thousand of
them are lost and gone -- consumed in making the improvement. If
he is to employ as many labourers as before, and pay them as
highly, he must borrow, or obtain from some other source, a
thousand quarters to supply the deficit. But these thousand
quarters already maintained, or were destined to maintain, an
equivalent quantity of labour. They are not a fresh creation;
their destination is only changed from one productive employment
to another; and though the agriculturist has made up the
deficiency in his own circulating capital, the breach in the
circulating capital of the community remains unrepaired.
The argument relied on by most of those who contend that
machinery can never be injurious to the labouring class, is, that
by cheapening production it creates such an increased demand for
the commodity, as enables, ere long, a greater number of persons
than ever to find employment in producing it. This argument does
not seem to me to have the weight commonly ascribed to it. The
fact, though too broadly stated, is, no doubt, often true. The
copyists who were thrown out of employment by the invention of
printing, were doubtless soon outnumbered by the compositors and
pressmen who took their place; and the number of labouring
persons now occupied in the cotton manufacture is many times
greater than were so occupied previously to the inventions of
Hargreaves and Arkwright, which shows that besides the enormous
fixed capital now embarked in the manufacture, it also employs a
far larger circulating capital than at any former time. But if
this capital was drawn from other employments; if the funds which
took the place of the capital sunk in costly machinery, were
supplied not by any additional saving consequent on the
improvements, but by drafts on the general capital of the
community. what better were the labouring classes for the mere
transfer? In what manner was the loss they sustained by the
conversion of circulating into fixed capital made up to them by a
mere shifting of part of the remainder of the circulating capital
from its old employments to a new one?
All attempts to make out that the labouring classes as a
collective body cannot suffer temporarily by the introduction of
machinery, or by the sinking of capital in permanent
improvements, are, I conceive, necessarily fallacious. That they
would suffer in the particular department of industry to which
the change applies, is generally admitted, and obvious to common
sense; but it is often said, that though employment is withdrawn
from labour in one department, an exactly equivalent employment
is opened for it in others, because what the consumers save in
the increased cheapness of one particular article enables them to
augment their consumption of others, thereby increasing the
demand for other kinds of labour. This is plausible, but, as was
shown in the last chapter, involves a fallacy; demand for
commodities being a totally different thing from demand for
labour. It is true, the consumers have now additional means of
buying other things; but this will not create the other things,
unless there is capital to produce them, and the improvement has
not set at liberty any capital, if even it has not absorbed some
from other employments. The supposed increase of production and
of employment for labour in other departments therefore will not
take place; and the increased demand for commodities by some
consumers, will be balanced by a cessation of demand on the part
of others, namely, the labourers who were superseded by the
improvement, and who will now be maintained, if at all, by
sharing, either in the way of competition or of charity, in what
was previously consumed by other people.
3. Nevertheless, I do not believe that as things are actually
transacted, improvements in production are often, if ever,
injurious, even temporarily, to the labouring classes in the
aggregate. They would be so if they took place suddenly to a
great amount, because much of the capital sunk must necessarily
in that case be provided from funds already employed as
circulating capital. But improvements are always introduced very
gradually, and are seldom or never made by withdrawing
circulating capital from actual production, but are made by the
employment of the annual increase. There are few if any examples
of a great increase of fixed capital, at a time and place where
circulating capital was not rapidly increasing likewise. It is
not in poor or backward countries that great and costly
improvements in production are made. To sink capital in land for
a permanent return -- to introduce expensive machinery -- are
acts involving immediate sacrifice for distant objects; and
indicate, in the first place, tolerably complete security of
property; in the second, considerable activity of industrial
enterprise; and in the third, a high standard of what has been
called the "effective desire of accumulation:" which three things
are the elements of a society rapidly progressive in its amount
of capital. Although, therefore, the labouring classes must
suffer, not only if the increase of fixed capital takes place at
the expense of circulating, but even if it is so large and rapid
as to retard that ordinary increase to which the growth of
population has habitually adapted itself; yet, in point of fact,
this is very unlikely to happen, since there is probably no
country whose fixed capital increases in a ratio more than
proportional to its circulating. If the whole of the railways
which, during the speculative madness of 1845, obtained the
sanction of Parliament, had been constructed in the times fixed
for the completion of each, this improbable contingency would,
most likely, have been realized; but this very case has afforded
a striking example of the difficulties which oppose the diversion
into new channels, of any considerable portion of the capital
that supplies the old: difficulties generally much more than
sufficient to prevent enterprises that involve the sinking of
capital, from extending themselves with such rapidity as to
impair the sources of the existing employment for labour.
To these considerations must be added, that even if
improvements did for a time decrease the aggregate produce and
the circulating capital of the community, they would not the less
tend in the long run to augment both. They increase the return to
capital; and of this increase the benefit must necessarily accrue
either to the capitalist in greater profits, or to the customer
in diminished prices; affording, in either case, an augmented
fund from which accumulation may be made, while enlarged profits
also hold out an increased inducement to accumulation. In the
case we before selected, in which the immediate result of the
improvement was to diminish the gross produce from two thousand
four hundred quarters to one thousand five hundred, yet the
profit of the capitalist being now five hundred quarters instead
of four hundred, the extra one hundred quarters, if regularly
saved, would in a few years replace the one thousand quarters
subtracted from his circulating capital. Now the extension of
business which almost certainly follows in any department in
which an improvement has been made, affords a strong inducement
to those engaged in it to add to their capital; and hence, at the
slow pace at which improvements are usually introduced, a great
part of the capital which the improvement ultimately absorbs, is
drawn from the increased profits and increased savings which it
has itself called forth.
This tendency of improvements in production to cause
increased accumulation, and thereby ultimately to increase the
gross produce, even if temporarily diminishing it, will assume a
still more decided character if it, should appear that there are
assignable limits both to the accumulation of capital, and to the
increase of production from the land, which limits once attained,
all further increase of produce must stop; but that improvements
in production, whatever may be their other effects, tend to throw
one or both of these limits farther off. Now, these are truths
which will appear in the clearest light in a subsequent stage of
our investigation. It will be seen, that the quantity of capital
which will, or even which can, be accumulated in any country, and
the amount of gross produce which will, or even which can, be
raised, bear a proportion to the state of the arts of production
there existing; and that every improvement, even if for the time
it diminish the circulating capital and the gross produce,
ultimately makes room for a larger amount of both, than could
possibly have existed otherwise. It is this which is the
conclusive answer to the objections against machinery; and the
proof thence arising of the ultimate benefit to labourers of
mechanical inventions even in the existing state of society, will
hereafter be seen to be conclusive.(3*) But this does not
discharge governments from the obligation of alleviating, and if
possible preventing, the evils of which this source of ultimate
benefit is or may be productive to an existing generation. If the
sinking or fixing of capital in machinery or useful works were
ever to proceed at such a pace as to impair materially the funds
for the maintenance of labour, it would be incumbent on
legislators to take measures for moderating its rapidity: and
since improvements which do not diminish employment on the whole,
almost always throw some particular class of labourers out of it,
there cannot be a more legitimate object of the legislator's care
than the interests of those who are thus sacrificed to the gains
of their fellow-citizens and of posterity.
To return to the theoretical distinction between fixed and
circulating capital. Since all wealth which is destined to be
employed for reproduction comes within the designation of
capital, there are parts of capital which do not agree with the
definition of either species of it; for instance, the stock of
finished goods which a manufacturer or dealer at any time
possesses unsold in his warehouses. But this, though capital as
to its destination, is not yet capital in actual exercise. it is
not engaged in production, but has first to he sold or exchanged,
that is, converted into an equivalent value of some other
commodities; and therefore is not yet either fixed or circulating
capital; but will become either one or the other, or be
eventually divided between them. With the proceeds of his
finished goods, a manufacturer will partly pay his work-people,
partly replenish his stock of the materials of his manufacture,
and partly provide new buildings and machinery, or repair the
old; but how much will be devoted to one purpose, and how much to
another, depends on the nature of the manufacture, and the
requirements of the particular moment.
It should be observed further, that the portion of capital
consumed in the form of seed or material, though, unlike fixed
capital, it requires to be at once replaced from the gross
produce, stands yet in the same relation to the employment of
labour, as fixed capital does. What is expended in materials is
as much withdrawn from the maintenance and remuneration of
labourers, as what is fixed in machinery; and if capital now
expended in wages were diverted to the providing of materials,
the effect on the labourers would be as prejudicial as if it were
converted into fixed capital. This, however, is a kind of change
which seldom, if ever, takes place. The tendency of improvements
in production is always to economize, never to increase, the
expenditure of seed or material for a given produce; and the
interest of the labourers has no detriment to apprehend from this
source.
NOTES:
1. Infra, book ii. chap. xvi. On Rent.
2. The clearing away of the small farmers in the North of
Scotland, within the present century, was, however, a case of it;
and Ireland, since the potato famine and the repeal of the corn
laws, is another. The remarkable decrease which has lately
attracted notice in the gross produce of Irish agriculture, is,
to all appearance, partly attributable to the diversion of land
from maintaining human labourers to feeding cattle; and it could
not have taken place without the removal of a large part of the
Irish population by emigration or death. We have thus two recent
instances, in which what was regarded as an agricultural
improvement, has diminished the power of the country to support
its population. The effect, however, of all the improvements due
to modern science is to increase, or at all events, not to
diminish, the gross produce.
3. Infra, book iv. chap. v.